I'm a Fellow at the Adam Smith Institute in London, a writer here and there on this and that and strangely, one of the global experts on the metal scandium, one of the rare earths. An odd thing to be but someone does have to be such and in this flavour of our universe I am. I have written for The Times, Daily Telegraph, Express, Independent, City AM, Wall Street Journal, Philadelphia Inquirer and online for the ASI, IEA, Social Affairs Unit, Spectator, The Guardian, The Register and Techcentralstation. I've also ghosted pieces for several UK politicians in many of the UK papers, including the Daily Sport.

No, It Does Not Cost 1/1000th Of A Penny To Send A Text Message

Eric Barker tells us that it costs something like 1/1000th of a penny to send a text message over a mobile phone network. It is of course possible to put the numbers that way: but it’s grossly misleading I’m afraid. SMS does indeed produce very good revenue for the telecoms companies but not the sort of amount that would be implied by selling for 20 cents something that has cost you one thousandth of once cent to do:

For cell phone users paying a la carte, the retail price of transmitted data is around $1 a megabyte. At that rate, the price of a 10-character message ought to be about 1/1,000 of a cent. Rounded to the nearest cent: free.

Even the 1/1,000-cent figure arguably overstates the true cost of a text. Unlike e-mail, Internet, and voice data, text messages are piggy-backed onto the cellular network. They occupy otherwise unused space in a control channel used for network maintenance. So as far as text messages are concerned, the cell phone companies are like the mean clique in high school who sold elevator passes (and there’s no elevator.)

What’s happening here is a confusion between marginal costs and total costs.

I’m perfectly willing to agree that for the network, the extra cost of sending one extra SMS text message is around and about 1/1000th of a penny. Umm, actually, no, I’m not sure I am. I think it would be more accurate to say that the cost of sending an extra SMS is zero. In the same sense that handling a phone call costs zero.

There might be some fractional amount of extra electricity that the company uses when handling a call or a text. Possibly an entry into the billing system as well. But everything else the company does is a fixed cost. The network of base stations, keeping them all on, running the system itself, having management and the biggie, buying the spectrum in the first place. All of these have to be paid for whether there is anyone at all using the network or not. They all fixed costs.

So it may well be that the marginal cost of an SMS is that 1/1000th of a penny. But there’s an awful lot of fixed costs that it has to contribute to as well. Which is why they’re not charging us 1 cent to send 1,000 SMS a month. Because those fixed costs have to be paid for somehow and it’s from the fees per SMS, per minute of voice calls, per GB of data, that they do pay for these things.

Conceptually of course they could just charge us all of those fees in one monthly lump sum. Say, perhaps, $100 or $200 a month. Then they’d be entirely happy for us to have unlimited texts, voice calls etc, for they would be covering all of their costs and, as the original piece points out, the marginal costs of use are tiny. But they do have to cover those fixed costs. In my native UK the telecoms companies paid the government £20 billion for the spectrum to run their services over. That money’s got to come out of the customer somehow, doesn’t it?

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